Itaú BBA - Itaú Activity Surprise Index - Widespread improvement in activity surprises

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Itaú Activity Surprise Index - Widespread improvement in activity surprises

junio 1, 2017

Our proprietary Itaú Activity Surprise Index rose to 0.22 in May from 0.10 in April, led by improvements all across LatAm.

Our Itaú Activity Surprise Index rose to 0.22 in May from 0.10 in April, led by improvements all across LatAm. In Brazil, better-than-expected job market figures compensated disappointing industrial production and retial sales. Chile’s activity releases painted a brighter picture in May, but a meaningful recovery is not on the near horizon. Peru registered the most expressive improvement in the region, as weather-related supply disruptions subsided over the past month.

The Itaú Activity Surprise Index compares trends in economic activity indicators released during the month to what analysts had been expecting for them. It is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means favorable surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility. Surprises in activity often trigger revisions in GDP growth estimates.

Brazil's index registered 0.36 in May from 0.30 in the previous month. Labor market data accounted for the positive surprises in May. In fact, April formal job creation (Caged) came in at 60 thousand jobs, higher than the market’s estimate (+40 thousand). Using our seasonal adjustment, 34 thousand jobs were closed, leaving job creation in negative territory. Nevertheless, the three-month moving average improved to -56 thousand (from -62 thousand), showing a moderation of job closings. The nation-wide unemployment rate reached 13.6% - a tad below the median expectation of 13.8%. Finally, Q1 GDP expanded 1.0% quarter-over-quarter seasonally-adjusted, matching the market’s call. This is the first positive figure since 4Q14. At the margin, agriculture led growth (+13.4% QoQ/sa), whereas the industry advanced much less (+0.9%) and services came in flat. In all, economic fundamentals are improving, particularly interest rates, paving the way for a broad-based recovery going forward. However, in order for the recovery to be solid, the reform agenda must continue to advance. The recent rise in uncertainty may affect activity through two channels: (1) by making companies and consumers more cautious, thus weakening aggregate demand and (2) by reducing the pace of monetary easing.

Mexico's index increased to 0.20 in May from -0.01 in April. March’s industrial production and retail sales figures came above median expectations. February gross fixed investment registered the main negative surprise: it dropped 3.1% year-over-year while the market expected a slight gain of 0.1%. We expect the uncertainty related to the Nafta talks and the tighter macroeconomic policies to have a negative effect over gross fixed investment.

Chile's index improved to 0.03 in May from -0.22 in April. The highlight  was March’s Imacec gain of 0.2% year-over-year, which came as a positive surprise vis-à-vis the consensus projection of a mild contraction (-0.4%). In contrast, the April manufacturing clip came in at -7.5% year-over-year - well below the market’s -1% estimate. However, correcting for the relevant calendar effect in April, manufacturing fell to a lesser degree (0.8%). Despite the improvement in the index, activity remains weak, and the lack of an evident catalyst suggests a meaningful recovery is not on the near horizon. We expect activity growth of 1.6% this year – stable from that registered in 2016.

Colombia's index edged up to -0.54 in May from -0.57 in April. In contrast to February data, high-frequency activity indicators surprised positively in March. Retail sales printed at 1.9% year-over-year (mkt: 1.05%) and industrial production came in at 4.77% (mkt: 2.5%). On the negative side, urban unemployment rose to 10.73%, surpassing median expectations (9.9). Looking ahead, urban labor dynamics will likely reflect disappointing activity and the need for fiscal consolidation.

Peru's index improved to 0.10 in May from -0.31 in April. The GDP proxy registered some positive growth in march (0.7% year over year), whereas the market had been expecting a flat reading. Likewise, the unemployment rate for the month of April came through expressively below expectations, but this surprise is largely due to a decrease of the participation rate. We expect GDP growth to slow down to 2.9%, from 3.9% in 2016, owing to temporary shocks. The “coastal El-niño” is already fading, but the disruption of large infrastructure projects will continue to be a drag over the year.


 

Find our surprise indexes on Bloomberg:

LatAm: ITMRLAI

Brazil: ITMRBI

Mexico: ITMRMI

Chile: ITMRCHLI

Colombia: ITMRCOLI

Peru: ITMRPI

Find our surprise indexes on Broadcast:

LatAm: ITSLA

Brazil: ITSBR

Mexico: ITSMX

Chile: ITSCH

Colombia: ITSCO

Peru: ITSPR

Methodology Note

Our Itaú Surprise Index LatAm compares trends in economic activity indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. Previously, the index was built considering the month that each indicator referred to. For instance, February’s industrial production released on March will be incorporated to March’s surprise index (before: February’s index).

The index is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means good surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility.

We build the surprise index for each country using all activity indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, GDP numbers enjoy a higher weight than consumer confidence and PMIs.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregated LatAm Surprise Index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged results are published (example: GDP), the surprise indexes may be revised.

Indicators on which the index is built:

Brazil: Caged Payrolls, Unemployment Rate, Exports, Imports, Retail Sales, Industrial Production, GDP, IBC-Br monthly GDP.

Mexico: Manufacturing PMI, Service PMI, Consumer Confidence, Investment, Industrial Production, Retail Sales, IGAE monthly GDP.

Chile: Manufacturing Production, Retail Sales, Unemployment Rate, Imacec monthly GDP.

Colombia: GDP, Industrial Production, Retail Sales, Unemployment Rate.

Peru: Monthly GDP, Unemployment Rate.


 

Luka Barbosa
Lourenço Paiva
Eduardo Marza


 



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